ATO issues warning to first-time investors

Ato Issues Warning To First Time Investors

A surge in first-time investors trading shares and exchange-traded funds (ETF) has prompted the ATO to issue a warning on share tax treatment and the behaviour that raises red flags.

The ATO on Monday warned young investors trading ETFs that any attempts to offset capital losses against tax paid on their income – or avoid paying it altogether if the share price of their ETF drops, but they still own the share – will be caught.

The ATO’s warning comes off the back of a wave of new EFT investors who have been afforded entry into the market off the back of the rise of micro-investment platforms popularised by the pandemic.

ASX data shows the Australian ETF sector swelled by some $20 billion in the first half of this year, 20 years after the first ETF product hit the ASX.

The product’s rise has been marked by two components. First, its simplicity: an investor can purchase one ETF, or a “basket”, which contains various shares in hundreds and sometimes even thousands of listed companies.

The second component that has driven their popularity is the emergence of micro-investing platforms that allow investors to buy in with small cash amounts. However, with a lowered barrier of entry has come a wave of tax misunderstanding among new investors.

The Tax Office reminded young investors that capital losses, or “paper losses”, only occur at the sale of a share, and can’t be claimed on shares that only see price dip. They also said that capital losses can only be offset against capital gains, and not other types of income.

ATO assistant commissioner Tim Loh said paper loss missteps have become a recurring trend among enthusiastic young investors but warned that his office’s data-matching capabilities will catch them out.

“Each year we see some enterprising entrepreneurs trying to offset their capital losses against income tax applied to other income such as salary or wages,” Mr Loh said. “Others attempt to offset a ‘paper loss’ against actual income.

“Our sophisticated data analytics are able to spot this and we may apply penalties for investors that have intentionally done the wrong thing.”

The Tax Office also offered clarity on the tax treatment of dividends and distribution reinvestment. The ATO said taxpayers should be mindful of declaring all distributions, even if they don’t withdraw cash from the account, and their shares are redistributed or reinvested.

Mr Loh said dividends and distribution have become an area of ETF tax treatment commonly and increasingly misunderstood by new or young investors.

“Most people recognise that they must pay tax on any money earned from selling shares,” Mr Loh said. “But many don’t realise that tax also applies to dividends and distributions, even if they are automatically reinvested into a reinvestment plan.”

Anything received through a dividend or distribution reinvestment plan is considered income for tax purposes, according to the ATO, and is treated in the same way as receiving cash would be.

Mr Loh said his office is keenly aware of the growth of the market and that these platforms have helped a “record” number of new investors into the market. But, he said, most of them aren’t aware of their tax obligations.

“Unfortunately, first-time investors often don’t understand their taxation obligations, don’t keep appropriate records and are more likely to make mistakes when lodging tax returns,” Mr Loh said.

He said that, while the ATO has access to data from ASIC, brokers, exchanges, and a whole host of other entities, it’s still important that investors double-check their declarations.

“While this data makes tax time much simpler, it is still important for investors to check that all their relevant data has been included,” he said.

Mr Loh said that keeping good records plays a crucial role in getting it right come tax time.

“Taxes on share and ETF investments can be complex, and poor record-keeping doesn’t make it any easier,” Mr Loh said.

“Keeping good records, including dates, prices, commissions, and details of taxable events such as share splits, share consolidations, mergers, and demergers is essential to avoiding trouble at tax time.

“We want to make tax as easy as possible and using data from share trading platforms and SDS from ETFs is a vital way that we help taxpayers avoid simple mistakes.”

John Buckley
07 September 2021
accountantsdaily.com.au

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